Executive compensation consultant media quotes and press releases

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"It sounds like a lot of money for a part-time job, but there are some pretty full-time risks," says Jan Koors of pay consultant Pearl Meyer & Partners.

Susan O’Donnell, a managing director at executive compensation consultant Pearl Meyer & Partners, agrees that there are a lot of gray areas when it comes to making a judgment call against a company’s compensation plan.

“There’s a lot of ire against ISS right now, and it’s frustrating for a lot of companies,” she says, noting that some ISS opponents are calling for more regulation from the SEC. ISS, she explains, has no authority, but “a huge amount of power and influence,” so given that, directors have to understand its rules. O’Donnell says the rising number of say-on-pay no-votes are increasing the chances of litigation. Beyond the lawsuits already filed, she says, “I suspect there will be more. Even if the litigation doesn’t stick, you don’t want to have that on your shoulders, because it’s a huge additional expense and a waste of time.”

O’Donnell offers three cogent tips to help directors make sure they’re prepared to face shareholders with their compensation plan:

The new trend is a departure from pre-crisis practices, said Peter Miterko, managing director at compensation consultancy Pearl Meyer & Partners.

“Nothing was deferred. It was straight-up cash,” Mr Miterko said. “You got your bonus cheque at the end of the year and that was it.” The pay consultant, who said he worked on five of the Fed’s pay reviews, reckons the new trend is likely to reduce excessive risk-taking. Senior bank executives tend to agree, he said.

“[Historically], if the banker and the bank had a great year, the banker would get a $5 million bonus, and in year two, if the banker had a bad year but the bank had a good year, he might get zero. There is something inherently wrong with that because zero is not enough of a penalty," says Peter Miterko, managing director at New York compensation consultant Pearl Meyer & Partners LLC. Deferring bonus pay allows the banks "to measure and encourage performance over a longer period of time," he adds.

There are many areas of debate when it comes to devising and explaining what are often complicated pay packages. However, directors should be aware of some potential red flags that deserve vigorous discussion by the compensation committee and full board. These include perquisites, tax gross-ups and evergreen arrangements, which seem to draw the most attention from shareholder activists and ISS. That said, board members were encouraged by Jannice Koors, managing director of Pearl Meyer & Partners, to have the courage of their convictions. “If you’re doing the right thing for the company and the shareholders, don’t worry if it’s slightly outside the norm,” Koors said. “Shareholders don’t necessarily want a cookie-cutter approach. They want demonstrated pay for performance.”

Directors need to control the narrative. The best way is through the Compensation Disclosure & Analysis (CD&A) filed in the proxy. Wrest control of the CD&A away from the attorneys and make sure that it addresses stakeholders’ concerns. The CD&A is an important communications vehicle that should be shareholder-, ISS- and media-ready. “The primary audience for the CD&A used to be the SEC. Now the CD&A is the company’s main ‘sales pitch’ to shareholders for say on pay,” Koors said. “Making the case sometimes means including more information than what is strictly required by regulations.”

“The ratio [between CEO pay and the median pay of a company’s workforce] is going to take an extraordinary effort to do, and companies are not going to do it until they have to do it,” said Joe Mallin, a managing director and head of the Atlanta office of New York-based compensation consulting firm Pearl Meyer & Partners LLC. “It is going to be an operational nightmare just to figure out how to do it, and it is also going to be a public relations/shareholder nightmare as the number will be out there in a vacuum.”

“I don’t suspect the ratio is going to have much impact,” he said. “We have a pretty good sense of what CEOs are being paid, and publicizing that number in the proxy isn’t going to do much.” Even as companies fret, there is still no way right now for them to even develop that formula, as the two-thirds of a page devoted to it in the 2,200-page bill provides no guidance on how to calculate that ratio. “The provision is very vague,” Mallin said. “There is nothing in the bill on how it is to be calculated and nothing on whether it includes just U.S. employees or all employees, and whether it includes part-time and seasonal employees.”

What will happen next with the marketwide proxy access rule is unclear. But the consensus is that SEC won’t appeal the ruling.“The SEC will likely propose a revised and presumably narrower rule” because the court’s ruling “contained unequivocal criticism of the rule,” Pearl Meyer said in a client alert the consulting firm issued after the court ruling July 22.

“Having relative measures can be an aid in getting compensation appropriate as setting the numbers is what is really difficult,”said Joe Mallin, a managing director and head of the Atlanta office of Pearl Meyer and Partners LLC. “But at the same time relative measures was one of the crutches companies fell back on” when they found goal-setting to be an exasperating endeavor.

The contentious issues with goals and targets for short- and long-term incentive compensation plans underscore the difficulty of the task, said Mallin. “The problem with setting performance objectives is that you are always looking in the rear-view mirror. Companies are always trying to rub the scales together to enhance the linkage between compensation and performance to get their performance they want to achieve,” he said.

Mallin agrees that there can be a disconnect between shareholder value and stock prices. “Stock prices and shareholder value don’t always move in tandem, as share prices move for reasons other than performance,” Mallin said. “That’s why companies are always looking for that Holy Grail that links to shareholder value. But a single solution doesn’t exist.”

“I get concerned when I see that a CEO makes five times more than the Number Two,” says Jim Heim, managing director at compensation consultancy Pearl Meyer & Partners. “Some groups of investors get concerned when it’s more than three times more.” When a company head earns far more than his management team, the logic goes, it indicates that the CEO is king and everyone else a courtier.

As noted in this recent study of 2010-2011 director pay conducted by the NACD and Pearl Meyer & Partners, director pay recently rose 5% at larger firms and 20% smaller firms, with an increasing emphasis on equity compensation in the form of full value shares.

Deborah Lifshey, managing director at compensation consulting firm Pearl Meyer & Partners, suggests that companies go through ISS's checklist and avoid certain pitfalls such as tax gross-ups, single-trigger severance packages during a change in control, and option re-pricing without the approval of shareholders. “Focus on ISS. They have become very powerful. Whenever possible, restructure and clean up pay practices according to the ISS checklist,” she says. Critiquing ISS's model won't change that reality, she adds.

Other methods companies have chosen to improve voting results include hiring proxy solicitors and increasing outreach to shareholders. According to Lifshey, outsiders say companies don't truly “pass” say-on-pay unless they received at least an 80 percent approval rate. Meanwhile, shareholders will have more time to review compensation plans in the next season. “Figure out what the votes in the past proxy season mean, and reach out to shareholders and ask the question why they are not voting for yes,” she says.

"Most companies are in a back-to-basics mode," says Peter Miterko, managing director with compensation consultancy Pearl Meyer & Partners. More firms are linking pay to performance through a mix of measures like return on assets, return on equity, and total shareholder return, he says.

"Companies are saying that we need to hit benchmarks," Miterko says. "If we do, we know that we'll end up with long-term value creation for shareholders."

Get Your Bank Ready for More Regulation of and Attention to Pay - Including Your Board's

Susan O'Donnell, managing director, Pearl Meyer & Partners, warned that board remuneration is hidden and embedded in the proposed rules.

O'Donnell said that explicit compensation policies in general are important. Five key elements are:

"This should be clear and easy to understand and to disclose to both regulators and shareholders," said O'Donnell.

At 108 companies in the Journal's survey, the CFO was either the highest or second-highest paid executive. "If you look at who the successors are when it's time for the CEO to retire, many times it is the CFO," said Peter Miterko, managing director of compensation consultancy Pearl Meyer & Partners. He says boards tend to grant potential successors big equity packages to keep them at the company.

A study by Pearl Meyer & Partners and the National Association of Corporate Directors, found median pay up 5 percent at larger companies and 20 percent at the smallest…Although director pay has increased steadily over the last decade, it hasn't drawn nearly the same type of investor scrutiny as executive management pay. “Except in rare cases, I don't see [much criticism]. Director compensation just doesn't have enough zeroes behind it,” says Jannice Koors, managing director with Pearl Meyer & Partners.

Proxy advisory firms like ISS Corporate Services and Glass Lewis & Co., which focus on corporate governance, want directors' compensation to include “a meaningful percent of equity,” Koors adds. “If directors are elected to be fiduciaries of shareholders, they should have some meaningful skin in the game.”

Companies also are moving away from stock options, which can encourage excessive risk-taking, in favor of restricted stock, Koors says. For instance, a director may be prohibited from selling some portion of his or her stock until after leaving the board. Restricted stock tends to make people a little more risk-averse, re-enforcing the idea that directors should first preserve the value already in the company, she adds. Another trend is the move away from fees for attending individual meetings, to a retainer structure, Koors says. In part, that's because it's easier to administer. Moreover, the nature of a board work has become more fluid; it no longer is limited to just a quarterly meeting, but also includes regular phone calls, e-mails, and committee meetings.

Pay could go even higher as the economy recovers, currently restricted stock and options vest, and executives look for new jobs. Tom Kelly, Charlotte-based managing director at compensation analysis firm Pearl Meyer & Partners, said retention is again a consideration for companies, though it's not yet as big an emphasis as in the pre-recession days.

Experts say worries about failing a Say on Pay vote are on directors' minds, even if they're likely to pass. To help fend off any shareholder unrest, companies are providing increasingly detailed explanations of why bosses are paid what they are, Kelly said. "It's a concern in the boardroom," he said. "No one wants to fail. Directors and management are reviewing their programs."

"That probably won't be the case in 2011," added Shekhar Purohit, managing director at compensation consulting firm Pearl Meyer & Partners, who predicted that CEO pay will increase more modestly this year as companies revise their targets to reflect a stronger economy.

"Nationwide, we have seen pay go down in the last two years and then go up again, but compensation hasn't returned to pre-recession levels," said Wes Hart, Houston Managing Director for executive compensation consulting firm Pearl Meyer & Partners LLC. Houston banks are fairly conservative when it comes to pay, he added, especially when their CEO holds a larger ownership stake. "Those individuals want to see their company's stock increase and are willing to take less in bonus compensation if it means the stock will turn around," he said.

Hart is seeing bank compensation policies shift to long-term incentives rather than short-term, as well as new risk components and claw-back options for bonuses. "Before, it was an annual focus, but not companies are looking at a longer time frame," he said. "They don't just pay out $1 million, but will defer half for three years."

In additional, regulations that are part of the Dodd-Frank Act required that some CEO compensation be deferred to reduce excessive compensation to executives. Those regulations have applied mainly to the largest companies, but Hart said they're trickling down to those that are smaller.

“The TSR [Total Shareholder Return] test is not the only way to assess a company's performance, and ISS typically does not does not consider the dynamics of the particular situation in reviewing CEO pay changes,” says Deborah Lifshey, managing director at Pearl Meyer & Partners, a compensation consulting firm. “As such, ISS applies a one-size-fits-all screening test to very different companies, causing many companies – that otherwise have very clean programs – to fail the assessment.” And yet, proxy advisory firms like ISS exert such significant influence over these votes that failure to pass ISS's performance test often serves the basis of a “no” vote, she says.

As for the shareholder derivatives lawsuits that are pending…“We'll probably have a good number of shareholders derivatives suits by the time this is all over,” says Lifshey.

New Comp Committee Agendas Driven by Latest Say-on-Pay, Proxy Disclosure Rules

Many compensation committees are now especially focused on choosing the right peer groups to help ensure effective comparisons between pay and performance for their executives, said Steven Van Putten, managing director in the Boston office of Pearl Meyer & Partners LLC. ‘‘The best way to compare performance to pay is to examine ‘realizable pay.’ This means examining pay that is actually being delivered or can be realized by the executive,’’ he said.

Unlike such prospective pay opportunities as target bonus and the present economic value of long-term incentives, realizable compensation offers a more meaningful comparison to performance, Van Putten said. This comparison should be done in relation to peers, he said. Furthermore, while total shareholder return is the most widely referenced measure of company performance, it remains very susceptible to the unexpected fluctuations in the market, Van Putten said. ‘‘Compensation committees may want to consider providing balance to their assessments by including metrics in the short-term and long-term incentive programs and metrics supported by shareholders as well,’’ he said.

What’s driving the relatively modest increases was that 2010 was generally a better year for community banks than 2009, said Susan O’Donnell, a managing director at Pearl Meyer & Partners. An improved economy meant fewer customers fell behind on their loan payments, she said. As a result, banks did not have to set aside as much money to cover potential loan losses, which helped push profits up.

Pearl Meyer & Partners Vice President Krissy Oliver, discussed a host of new regulatory requirements at a recent BankWorld program. An excerpt is below; the full interview is available at http://www.commercialrecord.com/news144107.html.

[Recent legislative and regulatory initiatives] broadly require banks to ensure that their incentive plans don't put the institution at risk. And to keep regulators happy, banks will have to centralize compensation decision-making, as well as thoroughly document the process, so the plan is clear and well-defined.

Compensation plans should all flow through human resources and the bank's board of directors, which has a lot more responsibility under the new regulations. That means different divisions shouldn't create their own compensation rules without approval, she added - something plenty of institutions don't yet realize.

It's also vital to document these decisions and plan adjustments, Oliver said, as regulators increasingly demand more documentation. That won't be so onerous once banks get their initial plans organized and in place, but establishing the new, regulator-approved compensation plans initially will likely be a big task.

Bonus compensation targets vary "by company and industry," says Michael Enos, managing director of Pearl Meyer & Partners, an executive compensation consulting firm based in New York. "What companies try to do is to set a threshold performance level."

Enos says Say-on-Pay will promote both written communications and conversations with institutional shareholders, a belief affirmed in a recent Pearl Meyer & Partners study of 279 participants, Looking Ahead to Executive Practices in 2011, which finds the "executive pay decision-making process continues to grow more transparent." Investors are demanding more information relating to links between pay and performance, as well as detailed explanations of how compensation risk is managed, according to the study. There also is "downward pressure on executive perquisite programs and severance arrangements."

Five Questions the Compensation Committees Should Consider when Evaluating the CEO

Susan O'Donnell, a managing director at Pearl Meyer & Partners, suggests compensation committees consider conducting five types of additional scenario analysis or modeling.

Compensation committees will need to be ready to answer these questions in the coming months. It’s how you can communicate a CEO’s worth, ensure a proper relationship between pay-performance, increase the likelihood of retaining your top performers and mitigate risk in your compensation programs.

Taking its cues from the Dodd-Frank Act, the Securities and Exchange Commission last week proposed rules to strengthen the independence of board members who serve on compensation committees and to curb conflicts of interest with compensation advisers. The details of those rules, however, is left to U.S. stock exchanges to write.

“The SEC closely tracked the language of the Dodd-Frank Act, and instead of giving us more guidance, what it essentially did was punt most of the decision making to the exchanges,” says Deborah Lifshey, managing director at Pearl Meyer & Partners, a compensation consulting firm.

“The SEC tends to be a little bit more stringent in its rulemaking, and the exchanges a little less so. By leaving it to the exchanges, [the final rules] probably won't be as aggressive as if the SEC had given us specific guidance.” That leaves companies waiting to see what happens next, Lifshey says.

As much as any controversy, the compensation debate is a war of attrition. It may become less vehement as the economy and job picture improve, but it will not go away – and certainly not during the next year when, as David Swinford, president and CEO of Pearl Meyer & Partners, observes, more companies are likely to review their director pay programs and extend similar increases in board pay.

The (FDIC) rule's new reporting requirements could cause tracking issues and become an administrative burden, says Deborah Lifshey, managing director at Pearl Meyer & Partners, a compensation consulting firm. "Boards and committees will have to dig deep to see which executives can cause material harm. There will also need to be three separate groups of individuals monitored, all for different reasons – Executive Officers, those individuals who could cause ‘material financial loss' and those individuals at larger institutions who could expose the organization to substantial loss in relationship to the firm's size," she says.

Lifshey also says the proposal has some ambiguity that ought to be addressed during the comment period. For example, "There might also be some questions for the rule about deferrals, because some people are wondering whether that applies to equity or does it also apply to cash."

Any final new regulation could also have unintended consequences in the firm's compensation structure, Lifshey adds. "Anything that's not incentive-based will fall outside of these rules," she says. "It's possible that financial institutions, especially those smaller in size, will try to avoid the burden of compliance by placing an emphasis on fixed compensation.' In other words, financial institutions might be so worried about whether or not the regulators will approve incentive pay, that they would put a greater emphasis on salary or salary stock."

Dave Swinford, president and CEO of Pearl Meyer & Partners, says boards have found that a more formal evaluation process facilitates a better dialogue between the board and the CEO about general style issues and some of the more qualitative aspects of the CEO’s performance.

“Boards have always been good at saying a CEO has achieved budget goals or they fell 5% short. Everybody can agree on what those results were,” he says. “It’s very hard to say, ‘You’re not developing a successor quickly enough,’ and it’s even harder to say, ‘Your communication with the board around this issue is really very negative, and we’d all get along better and deal with things better if you did such and such instead.’”

While 360-degree-type reviews of CEOs are less common, a CEO self-evaluation is “critical to an effective evaluation process,” says Swinford. It puts CEOs in the position of thinking about their performance in detail beyond whether or not they hit a goal and about how things got done rather than whether they got done. In addition, says Swinford, it puts CEOs on notice that their boards are thinking about some of the less quantitative aspects of their performance.

When it comes to leadership assessment, says Swinford, boards often have a short list of areas they’re concerned with regarding the CEO’s performance. The list typically includes management development and succession, shareholder and investor relations, the CEO as a leadership role model and communication — especially with the board. In some industries, says Swinford, boards also assess how CEOs represent the industry, such as in health care and education.

“The results [of the NACD survey] are exactly what I would have expected overall,” said David Swinford, president and CEO of Pearl Meyer & Partners. “People have become more confident over the past year, in large part because of the continued increase in economic activity and increased stock market prices that have largely alleviated the fears of a double-dip recession. At the same time, people are more confident further out, largely because they’re getting validation of economists’ original prediction that the recovery would be at best a slow, steady process.”

Contrary to the third quarter, directors feel slightly more optimistic about their own industries in relation to the general economy. “People are more confident in their own industry than in others. You know your own environment pretty well and the further away from your center of your universe, the less confident you are about it,” Swinford observed. “There’s a much higher appreciation for the potential impact of the unknowns than there used to be.”

Jim Hudner, managing director of Pearl Meyer & Partners, said variable pay's portion of overall compensation has been rising as fixed-salary increases have been gradually falling. Over the past 20 years or so, salary budget increases have dropped from about 5% to roughly 2.5%, he said. "Organizations have been increasing how much they spend on bonuses, in both dollar amounts and the percentage of the population that is eligible for a bonus," Hudner said. "As we move along the curve of the economic recovery, employers are probably going to be banking more on the use of variable pay than on increasing their fixed-costs and salaries, just to be conservative."

Pearl Meyer's latest survey of 316 employers....puts the average forecasted salary increase at about 2.9% this year. Hudner said that's up from the mid-twos last year and 2% or just below in 2009. Better-than-average salary increases may go to sales and marketing and to research and development employees, he said. Driving this overall gain are corporations' better cash positions and "fundamentally better business performances generally," Hudner said.

Executive compensation especially should reflect this progress, he said. "In fiscal year 2010, about one-quarter of the organizations we surveyed either froze or decreased executive base salaries," Hudner said. "In fiscal year 2011, only 6% anticipate any kind of salary freeze or decrease." Likewise, on executive bonuses, employers said last year that some 18% of executives wouldn't receive bonus or incentive payouts for 2009's performance. That number fell to 5% in 2011 for 2010's performance, he said. "There's quite a bit more optimism."

“Companies are starting to link clawbacks directly with risk because of the heightened scrutiny and disclosure of the role of risk in compensation plans,” says Yvonne Chen, managing director at Pearl Meyer & Partners. “Also, the general public sentiment that improper risk analyses led to the financial market meltdown has placed a spotlight on how risk is managed and whether defects in risk management have resulted in any overpayments to those responsible.”

The trend away from paying executives’ income tax on perks is expected to continue. In fact, a recently conducted survey by Pearl Meyer & Partners indicated that several companies expect to eliminate the perk in 2011.

U.S. regulations mandate that only risk-takers - like a trader or loan officer - have to defer a bonus for an amount of time proportional to the risk involved, according to Peter Miterko, managing director at Pearl Meyer & Partners, an executive compensation consulting firm. CS's new rules defer bonuses for all employees who get roughly a $50,000 bonus, regardless of what they do at the bank.

"[Regulatory change] is going to be evolutionary," says Susan O'Donnell, managing director, Pearl Meyer & Partners. "Regulators are still working it out and a lot of them are still learning themselves."

The interagency guidance on "Sound Incentive Compensation Policies" mandates regular review of a bank's compensation structure as it affects any employee who has the ability to expose the institution to material risk. The rules will have at least some impact on every bank in the country, says O'Donnell. "Everybody has to go through the review, and everybody is going to have to make some tweaks and changes, but the degree of them is certainly different for Morgan Stanley than it is for the community bank down the street."

“In 2011, retention aspects of compensation plans will matter,” says Jim Heim, managing director at Pearl Meyer & Partners. “There are now many companies that can afford to raid and take your talent.”

In contrast with the earlier prevalence of cash awards, most companies now use equity as the base of their retention bonuses. “You will see more one-off retention awards in the form of time-based restricted stock,” says Heim. “You can’t address retention with [cash] base pay.”

Jim Hudner, managing director at Pearl Meyer & Partners, says employers are going to be very cautious about raising salaries in this economy, so they will place more emphasis on "variable pay" such as bonuses, stock options and other incentives. "That way, if things don't go well, they are not committed to paying them, whereas they are committed to paying the fixed costs of salaries," Hudner says.

With respect to increasing stock options and other forms of equity-based compensation, such increases will be targeted to a relatively narrow population in all likelihood, Hudner says. It would be a continuation of a trend that started when companies were forced to expense their stock options; moreover, institutional shareholders are now watching more closely the granting of equity within organizations due to the dilution of the shares and other interests important to shareholders. Lastly, the impact that equity has on rank-and-file employees is probably much more limited, so many employers opt to reward them in other ways, he says.

With investor advisory votes looming, executive compensation strategy and philosophy, pay-for-performance relationships and compensation-related risk are at the top of the list of pay topics companies are reviewing in 2011, according to the latest survey by compensation consulting firm Pearl Meyer & Partners.

All companies are a doing a much more rigorous analysis on their pay-for-performance analysis in particular, says PM&P managing director Jim Heim. Even though the Dodd-Frank required disclosure rules on [performance-based plans] aren't expected until at least next summer, Heim says companies are trying to do their homework now about the types of analyses they should be looking at to tell their story to shareholders.

In addition to annual bonuses, the value of executives' long-term equity grants will be higher for 2010—not because companies necessarily granted more shares, but because the underlying stock values have improved, says David Swinford, president of compensation consulting firm Pearl Meyer & Partners. The Dodd-Frank Act includes a pair of measures that will increase the visibility of compensation issues....As a result, it isn't uncommon in boardrooms to hear directors ask, "What will shareholders think of this?" Mr. Swinford says.

PM&P Managing Director Susan O'Donnell was interviewed about how the new environment for executive pay in the Banking industry will affect Boards' decision-making for 2011 and beyond.

What was ‘acceptable’ practice several years ago might be considered inappropriate today…As executive compensation is under increased pressure, boards need to be ready to respond to the new level of scrutiny. More importantly, they will need to articulate their own compensation philosophy and develop programs that address their own unique needs, rather than chase historical market practice, which in many cases is no longer applicable or appropriate.

“In favorable economic conditions, you’re making investments and making sure those investments are impacting your bottom line and that you’re growing,” says Jim Heim, a managing director and compensation consultant at Pearl Meyer & Partners.

These growth-focused measures are also publicly available in company filings, which might make them more attractive to shareholders. “Profitability measures are usually tied to or part of the income statement,” Heim says. “Since profit measures are readily available, it’s easy for investors to use them to compare company to company.”

“I might expect to see a little more change in 2010 than in 2009, because in 2009 people were coming off a year when performance wasn’t that great and I think there was some paranoia about changing metrics or just making the hurdles too short,” says Jim Heim, a managing director and compensation consultant at Pearl Meyer & Partners. “In 2009 [boards] might have been a little more hesitant, because they were unsure of whether it would look like they were tinkering with them to drive performance for shareholders or to ensure a payout.”

“We’ve seen almost all boards we talk to at least ask about relative metrics,” Heim says. More directors have also been seeking information about measures of capital efficiency, such as return on invested capital (ROIC), compensation consultants say. “ROIC is a good metric for comparing companies across industries, because your results don’t vary too much based on whether you have significant infrastructure or even whether you’re financing via debt or equity,” Heim says.

“The process [of an internal audit] can shine a light, to make sure assumptions and intentions match reality,” says Jim Hudner, a Managing Director at Pearl Meyer & Partners. “If there’s a disconnect, you can correct it for the CD&A.”

"Ideally, the internal audit will precede the CD&A," Hudner said. "The information provided by an internal audit creates an effective road map to update compensation programs so they remain relevant and effective even in a changing economy.”

“Boards do a good job at telling shareholders what the metrics are, but less so at telling why these metrics were chosen and how they relate to strategy and moving the company forward,” said Jan Koors, Managing Director at Pearl Meyer & Partners.

This first NACD Board Confidence Index, a collaboration between NACD, Heidrick & Struggles and Pearl Meyer & Partners, is designed to measure boardroom confidence in the economy and in business, reflecting how public company board directors feel about the overall American business climate, as well as their own companies’ prospects now and in the future.

The data indicates that many directors are cautious, perhaps even skittish, says David Swinford, president and CEO of Pearl Meyer & Partners, the executive compensation consulting firm. “Frankly, there are two interpretations of this data: how we were a year ago versus how we were last quarter, and what do we see next quarter. It seems the economy recovered somewhat a year ago, but has gone flat as the recovery has slowed significantly. It appears we’re worried that we are headed downhill.”

Another executive compensation consultant, Ed McGaughey, managing director and Houston office head of Pearl Meyer & Partners, says he found a slightly different overall result when looking at a larger group of Texas companies: the 250 highest-grossing public companies in Texas. McGaughey says total compensation levels for executives in that group (not just GCs) increased by a small amount in 2009 compared to 2008. He attributes much of that improvement in 2009 to strength in the energy industry.

The say-on-pay provision is likely to increase the importance—and length—of the compensation discussion and analysis portion of proxy statements. Susan O’Donnell, a managing director in the Boston office of Pearl Meyer & Partners, tells her clients that more is usually better. “You have to sell the story behind the package,” she explains. “Don’t assume that investors know anything.”

O’Donnell offers the example of a recent proxy issued by one struggling mid-sized bank. The board is pursuing a turnaround strategy and recently lured several sharp executives from another bank with some bigger long-term incentives. The investment is expected to pay dividends, but hasn’t yet. “By the numbers alone, I wouldn’t have supported it,” she says. But the beginning of the CD&A featured an executive summary “that laid out the context behind the board’s thinking wonderfully.… With that context, you understood what they were doing.” The package was supported by a majority of shareholders.

O’Donnell says that while small banks with relatively simple pay packages don’t need to make abrupt changes in their compensation practices, they nonetheless should begin looking at the regulatory guidance that is being applied to bigger banks. “Generally speaking, when the regulator comes in the door next time, you want to be able to say, ‘Here’s what we’re doing, here’s what we’ve reviewed, here’s our assessment of the situation, and where we are in the process,’” she explains.

With Dodd-Frank pay rules pending, there are more questions than answers. But there are steps banks can, and should, take now. “We’ve got a new set of lenses and have to look at things differently,” says Susan O’Donnell, managing director at Pearl Meyer & Partners, a consulting firm that works with many banks. “That’s not necessarily a bad thing.”

Consultants say banks can start by getting their compensation house in order now, and by doing some rethinking of the fundamentals before deadlines loom…O’Donnell points out that the June regulatory guidance is in effect now, so that whenever examiners next visit the bank, they will be expecting progress. Especially in larger organizations, the right hand may still not know what the left hand is doing in regard to incentive pay and risk, says O’Donnell. She says now is the time to unify oversight and coordination of all incentive plans across all parts of the organization.

While this is a time to review, before the regulatory buffeting resumes, O’Donnell advocates some moderation. She worries that community banks, many of which didn’t engage in anything remotely like what caused the industry’s troubles, not throw out a good program because of fear of what regulators will say. Examiners will clearly be looking at lender programs, for instance. But even those shouldn’t just be shut down. “Incentive pay is a very good way to drive compensation,” she says. Don’t ditch a useful carrot.

“Thanks to ISS’s adding them to its list of problematic pay practices, there’s been a movement away from providing all post-employment perquisites,” says Deborah Lifshey, a Pearl Meyer & Partners compensation consultant and Managing Director.

"It is a new world with say-on-pay, majority voting for proxy elections, improved access for shareholders to nominate their own candidates for the board, and the stipulation that brokers can no longer vote without express voting instructions from the shareholders they represent,” said Joe Mallin, managing director of the Atlanta office of Pearl Meyer & Partners LLC. “How that will all play together could have a big impact on how boards look at executive compensation,” he said.

“Companies will need to put everything about pay and the board’s analysis of executive compensation into a few pithy paragraphs for stockholders. They are doing a good job today on providing information about pay, but not on the analysis of pay. The SEC wants companies to tell more of the whys, not just state what they are doing.”

Joe Mallin, managing director and head of the Atlanta office of New York-based compensation firm Pearl Meyer & Partners LLC, [said] “I think plastics companies and manufacturers will continue to restrain compensation, particularly in salaries and in annual incentive awards. I don’t see huge changes because manufacturers still don’t know what the future holds relative to the economy. There will be some snap-back in long-term incentive awards — but I don’t see them going back up 20-25 percent.”

An analysis by Pearl Meyer & Partners found that 63 percent of companies used downward discretion in 2009. “Even though discretionary judgment is traditionally viewed negatively, in reality, the judgment has been pretty even-handed,” Mallin said. “A lot of committees did the right thing, and didn’t give executives a payout in 2009 because they looked at results and decided a bonus wasn’t appropriate. It wasn’t my observation that it was always a win for management."

“It makes sense to look at targets within the context of a changing economic environment.”

Compensation is a determinate factor in director and CEO appointments, an already difficult process. Peter Lupo of Pearl Meyer & Partners described how, though director pay has shown little change, the structural components of payment have been significantly altered.

"In recent years we have seen companies moving away from using some of the more executive-friendly bonus definitions for computing severance, such as the maximum opportunity or the highest bonus over a period of years," says Margaret Black, a compensation consultant at Pearl Meyer & Partners.

The board's reduction of the bonus component of severance is just one example of how companies have responded to pressure to remove executive-friendly provisions from change-in-control agreements that might have been more commonplace before, says Black.

"Some provisions that were fairly common in change-in-control agreements in the recent past such as excise tax gross-up provisions and walk-away provisions (contracts allowing executives to voluntarily leave for any reason after the CIC and still receive severance) are now perceived by some institutional shareholders and shareholder advisory services to be excessive," she writes in a e-mail.

In fact, the percentage of 61 Fortune 500 companies with executive change-in-control arrangements that included excise tax gross-ups declined to 62% in 2009 from 74% the previous year, according to Pearl Meyer & Partners data.

Jack Milligan, Associate Publisher of Bank Director magazine, spoke with PM&P Managing Director Susan O’Donnell about the impact of new regulatory initiatives on banking Compensation Committees. An excerpt follows:

All members of the Committee will need to be independent under standards to be set by the SEC and the stock exchanges. We expect this may result in a similar standard to what exists now for Audit Committees. This may be an issue for smaller community banks, many of which have Compensation Committee members who provide services or help the bank in a way that might violate the future independence standards. I've already heard concerns from some of my clients that this will reduce their population of potential independent directors.

Eighteen percent (8% more than in 2008) of 61 Fortune 500 companies that provide CIC arrangements to their executives included the "best after-tax" provision in their arrangements in 2009, according to Pearl Meyer & Partners data. During the same period of time, the percentage of these companies providing excise tax gross-ups provisions to their executives also declined. While 74% of these companies provided this perquisite to executives in 2008, only 62% offered the excise tax gross-up in 2009.

The regular paycheck is just the starting point, said Joe Mallin, managing director and head of the Atlanta office of Pearl Meyer & Partners: "What you get paid for is showing up and putting forth effort."

If that effort doesn’t produce the right results, the rest of the package of bonuses and stock options are not going to kick in, Mallin said. Yet setting up the incentives is not simple, he said: For what is the CEO truly accountable? How much of a change can he or she make? Do you compare the company’s success to the broad economy? To the industry? To similar companies? Or perhaps only to its own past?

"I spend a lot of time with lots of boards and I get the impression that they believe they are more pay-for-performance-oriented than in the past," Mallin said. "Forecasting the future is inherently difficult, and it seems like over the last 10 years it has become more difficult."

"As soon as it became clear that options would carry an expense, they were the first thing compensation committees re-examined", said Jim Heim, managing director in the Boston office of executive compensation consulting firm Pearl Meyer & Partners.

"We're nearing a tipping point at tech firms where time-vested restricted shares may make more sense than options," Heim said.

As Shareholder Scrutiny Rises, CEOs' Once-Unassailable Perks Face the Ax, Too

"The first wave in the evolution of perks was getting rid of the status perks — the country clubs, the Lear jet," says Jannice Koors, director of the Chicago office of independent compensation consultancy Pearl Meyer & Partners. Companies were able "to keep the perks that made executives more productive, like the car and driver so he has more time to work. Now even those perks are getting heavily criticized."

"We're counseling our clients that, with the amount of press perks get and the ire they generate, nine times out of 10, it just isn't worth it," Ms. Koors says. "You've only got so much attention from the public and your shareholders. Is this what you want to spend your time defending?"

Washington Weighs Stronger Rights for Shareholders Compensation Practices and Risk Management

"Everybody's waiting to see how much everybody else says [about compensation-based risk]," says Jannice Koors, a managing partner at Pearl Meyer & Partners LLC in Chicago. "My guess is this first year we're going to see a lot of boilerplate language. Whether or not future disclosure is any different depends on how the SEC reacts to that."

"[Say on Pay is] likely to be less effective here because, in England, the concentration of major shareholders is much greater," Ms. Koors says. "American shareholders are less likely to agree on what their objectives are. And having shareholders say, 'I don't like your pay program' is only effective if they can also say, 'Here's what I want you to fix.'"

The findings [of Pearl Meyer & Partners' pay-for-performance survey] show corporate boards are taking a bigger role in setting and enforcing performance standards. As a result, public companies are likely to make fewer incentive payouts to executives who fail to hit specific performance targets, says Matt Turner, managing director of PM&P.

Companies have traditionally had some discretion to make payouts when performance targets were missed to recognize executives' efforts or factors outside their control. Now, Turner says directors face pressure to directly link pay with meaningful performance, since proxy disclosures give investors detailed information about how incentive plans are administered.

While most directors expressed a willingness to pay executives more for truly superior performance, they're uncomfortable with the idea of open-ended pay programs. Turner says their concern likely relates to uncapped cash bonuses and equity "mega grants."

"Directors are less comfortable than they were five or six years ago with extremely large payouts even when is performance strong, which signals a shift in thinking that paying for effort for executive compensation is not a good idea," say Turner.

Pay Pressures Play Both Ways - Compensation for CFOs at Big Companies Holds Up Better Than Expected

According to Steven Van Putten, managing director at Pearl Meyer & Partners, a New York-based compensation consulting firm, companies that had put in place pay freezes or reductions are starting to move base salaries for executives back up to previous levels.

In any case, the timing is probably good for CFOs, largely because the role of the finance chief has assumed added importance in the current climate..."I think that means CFOs can expect healthy increases this year." Van Putten says he has seen a rise in "significant" salary adjustments specifically for CFOs, especially at companies providing little or no merit increases.

The focus on risk has affected a number of compensation areas. For example, according to Van Putten, more companies are evaluating the mix of short vs. long-term pay components "so you don't incentivize short-term performance at the expense of long-term results."...It's a delicate dance, however. "If you discourage risk too much, it could be counterproductive," says Van Putten. One common solution, he says, is to replace stock option programs with performance share programs. He cites a consumer products company that had relied on stock options awarded on the basis of operating income performance. and recently decided to reduce the value of options by one-half and replace them with performance shares that would vest in three years only if specific goals were realized. The company also added a net-share retention requirement on stock options, mandating that executives hold onto 50% of any shares realized from exercising options until they meet a specific ownership requirement.

Banks adopting new compensation policies should not eliminate incentives for individual performance, Susan O'Donnell, a compensation consultant at Pearl Meyer & Partners, has said. The advice comes as regulators have proposed rules that rein in compensation practices which encourage employees to take risks that would threaten the firm's stability.

The proposals have raised fears that some banks will do away with incentive-based compensation plans and opt for fixed pay plans instead. "To take that away would be going into an environment of fixed pay. That goes back to 20 years ago. Incentive pay helps performance. If you take that away we drive up fixed costs which can affect competitiveness," O'Donnell said.

Laura Hanf, a compensation consultant for Pearl Meyer & Partners LLC, said she is seeing more regional banking companies express interest in clawbacks as a way of aligning the interests of management and investors. Alternative changes to clawbacks could involve lengthening the amount of time it takes to earn an incentive. Many banks are looking to scrap the long-standing model based on annual payouts to ones that cover multiple years. Others are interested in replacing time-based vesting altogether, issuing performance-based restricted stock instead.

Hanf said another area ripe for review involves incentives for loan officers, particularly those dealing in commercial lending. However, she said, few banking companies have reached a stage of implementing such changes.

People want to be paid for what they do and recognized for their services. However, most firms focus on the greater organization and are less about the individual. The companies that are having the most success are those that are really trying to differentiate the best performers, who pose the biggest risk of leaving, from everyone else. The goal is to give greater rewards from a fixed pool to your top performers to encourage retention for a longer period of time. This is still a work in progress for many companies.

Jan Koors, managing director at Pearl Meyer & Partners, said the data [showing relatively few women on corporate boards] shows that companies historically have looked for board members from the ranks of their chief executive officers and former CEOs. Yet times are changing quickly. "Women have started to move up the corporate ladders to fill those CEO positions," she said. "And boards are now reaching beyond the corner office to fill new-member positions."

David N. Swinford, president and CEO of Pearl Meyer & Partners, led a group of directors in a robust discussion of the current challenges of executive compensation and risk oversight at the Directorship 2010 Corporate Governance Outlook Roundtable at Nasdaq OMX in New York.

Swinford addressed the concept of simplification, not over-simplification: "We have a lot of things in our executive compensation programs that are not only hard to explain to shareholders-but in fact, in many cases, the participating executives do not understand them." He emphasized that "by trusting your gut and being very candid in your deliberations with each other, putting all of the issues on the table and having the courage to say, 'This isn't the right thing to do, we should do it differently,'" will enable [directors] to create programs that will stand up to shareholder and regulatory scrutiny. Swinford said that he believes "discretion" is often a negative term, and suggested that "judgment" be considered as a substitute. "It allows people to say, after the fact, [if] it turns out that the performance goals were too easy, either because the economy was better than expected, or vice versa. It means executives would commit to never coming back and asking for special exceptions to the way the plans work," he said....

"I don't think there's any argument for balance at all [between long-term and short-term shareholders]. I think in this analysis lies the roots of schizophrenia." He added that as soon as a board attempts to appeal to one particular group, the result is a situation where a board is trying to manipulate results to meet the needs of that particular group-and it can't be done. "You cannot manage for maximum share price appreciation in one year, two years, three years," Swinford said. "You can try. But in the long run, you will not succeed at doing that."

According to compensation consultants Pearl Meyer & Partners, the typical director of a large corporation made $216,000 last year, up from $129,667 in 2003.

FDIC's Comp Proposal Raises Questions and Concerns - Plan Would Link Compensation to Deposit Insurance Assessments

"Compensation has become a lightning rod for the financial crisis, but the financial crisis' roots goes beyond compensation in my opinion," said Susan O'Donnell, managing director at Pearl Meyer & Partners, a leading compensation consulting firm.

"Most of my bank clients are either in a state of panic about this, or are trying to put processes in place without really knowing exactly what they have to do or what the regulators are going to ask for," O'Donnell added, reflecting on the mass of concern over pending legislation, the Fed proposal, and the FDIC announcement.

For O'Donnell, the FDIC's fixation on restricted stock as part of the "safe" structure is puzzling and problematic. Compensation programs are best when matched to corporate strategies, O'Donnell said, and many plans, in her experience, are not stock-based and yet don't encourage excessive risk taking. As published, she said, the FDIC concept "is very, very TARPish."

The flip side of not encouraging risky behavior in the short-term, added O'Donnell, is "sustainability of performance in the long-term. And you can get at that through many means."

In general, executive pay cuts have been "modest," in the 5% to 10% range, says Steven Van Putten, managing director at Pearl Meyer and Partners. "You're focused on cost control and you're focused on perception," he says. "You want to show executives are sharing in the pain."

A number of companies that announced executive salary reductions in 2009 after the Equilar count have already restored those salaries as well...."As economic activity picks up generally, there's concern about retention, irrespective of what's going on in a particular company," notes Van Putten.

Money Talks: Community and Money Center Banks Clash as Do Regulators Over Incentive Pay

The Fed's approach - shifting to more salary-based pay - also runs counter to the shift toward pay-for-performance, offers CEO David Swinford and Managing Director Susan O'Donnell of Pearl Meyer & Partners, an executive compensation consulting firm in New York. "Removing or obfuscating the line of sight between concrete actions and outcomes may eviscerate incentives to achieve important goals," they write. "We fear that the unintended consequences of these burdens will be abandonment of any incentive compensation programs whatsoever, and perhaps higher salaries.... to make up for the difference."

Susan O'Donnell, a managing director at compensation practice Pearl Meyer & Partners LLC, said that while claw backs are emerging as a way to promote a focus on long-term performance, they can be difficult and costly to enforce. Instead, she said, financial-services firms are talking more about so-called bonus banking, where part of the bonus is "banked" in a savings account and paid out incrementally over a number of years. "The idea is to hold back some of the performance bonus, and pay it out after that performance is sustained," she said.

"Increasing shareholder accessibility to information is a good thing," said Greg Stoeckel, managing director at corporate governance consultant Pearl Meyer & Partners LLC's Atlanta office. "Helping other shareholders understand the totality of their stake in the company and 'Are they making money by doing this?' adds transparency."

Pay for Top Carolinas CEOs Rose Last Year - Trend Not Likely to Continue in 2009

"It's harder and harder to be a CEO right now, with all the pressure to perform in a down economy," said Mark Rosen, managing director in Charlotte for Pearl Meyer & Partners, an executive compensation consulting firm.."Through the third quarter of last year, many organizations had record years. Then everything fell off the cliff."

Click here to listen to an interview by ABA Banking Journal Executive Editor Steve Cocheo with Managing Director Susan O'Donnell on how the Federal Reserve's proposal on executive pay is likely to affect community banks and what boards and management need to do.

All in all, the Fed's [proposed guidance on pay practices at certain financial institutions] shouldn't come as a great surprise, said Susan O'Donnell, managing director at the Pearl Meyer & Partners consultancy. She added that even clients who believe that they won't be affected directly by the Fed proposal have called asking for guidance, in the belief that their institutions will eventually need to follow suit simply as a "best practice."

David Swinford, president and CEO Pearl Meyer & Partners, a compensation consultant, told conference attendees that companies are still focusing too heavily on short-term incentive schemes.

"I consider short term as anything under five years," Swinford said. "We've gotten too short term in our thinking."

"Everyone is interested in hearing the 'blueprint' and guidelines that he is setting for these large companies," said Susan O'Donnell, managing director at compensation consultancy Pearl Meyer & Partners.

According to David Swinford, CEO of Pearl Meyer & Partners, a New York City-based compensation consulting firm that helps comp committees put pay proposals together, boards are demanding more of these committees. "Increasingly they're insisting that comp committees justify their pay recommendations," he says...Boards are putting pressure on the committee members to explain how and why they've come up with certain compensation proposals — proposals that could become the subject of external debate or perhaps litigation. "We have to convince them of our recommendations," says Swinford, "and they have to be able to convince the board."

Mark Rosen, with consultants Pearl Meyer and Partners in Charlotte, expects many perks to vanish. Compensation committees "are asking the question, 'Why can't you (cover perk expenses) with the money we are paying you?'" he said.

"Companies are setting broader ranges for short-term performance targets and lowering the threshold that needs to be reached for an initial payout," said Joe Mallin, the managing director of the Atlanta office of New York-based compensation firm Pearl Meyer & Partners. "Companies had a great deal of difficulty in setting target plans this year because of the uncertainty in the economy," he said. "So most companies widened the range and moved the target for the first payout under short-term incentive plans lower, because the potential range of outcomes was so wide and difficult to forecast."

"If a company in the past set a range of $40 million to $60 million for an operating-income performance metric", he explained, "it would be prone to change the range to $30 million to $70 million, with the first payout under the plan occurring at $30 million."

..."Executive compensation is unfairly painted with a dark brush in the United States, and I disagree with that assessment of it," Pearl Meyer’s Mallin said. "In general, I think the plans worked. I think most companies do compensation pretty well. There is a lot more pay for performance than the business world is given credit for. Unfortunately, it is the pay for non-performance that winds up getting the headlines."

"There was a huge movement during the 2004, 2005, 2006 time frame" for boards to start using tally sheets because at that time companies weren't required to disclose a tally or a single number indicating what an executive was making, says Michael Enos, a compensation consultant with Pearl Meyer & Partners.

In 2006, the SEC's expanded compensation disclosure rules may have reduced the urgency boards feltby requiring that boards include the information typically contained in a tally sheet in their proxy statements, Enos says. With scrutiny of executive compensation heightening, however, a board might decide to adopt a tally sheet policy to improve corporate governance and for optics purposes. "I think [disclosing the use of tally sheets] demonstrates for shareholders that boards are going to be making informed decisions," Enos says.

Ask tough questions on the dangers of risk and pay elements, says Pearl Meyer comp consultant Deborah Lifshey. "Is there any piece of the comp plan that could take down the company? Also, run the numbers on the plans at the most outrageous levels of achievement possible. If they really do look outrageous, there's probably too much risk."

Over the last year, much has just been "slapped on banks quickly," says Susan O'Donnell, Boston-based managing director for the Pearl Meyer & Partners consultancy. "We'll see the repercussions of this on the back end." The irony, O'Donnell hears from bankers, is that they are facing potential limitations, or major shifts, to their compensation when many of them are working the hardest of their careers.

The reaction in many community banks, in the short term, has been to excuse themselves from as much of the current trouble as possible, says O'Donnell. "There has been a huge shift towards increasing base salaries," she says, and pulling away from incentive pay and long-term compensation.

That's a boomerang from the immediate previous trend, towards an emphasis on performance-based pay for top officers. Boards liked that, O'Donnell says, because it encouraged results. Over time, however, when the tide was rising, a certain level of performance pay began to be regarded as an "entitlement," to use O'Donnell's word. "Now, that entitlement mentality has to be readjusted," she says. The other paradox is that as base pay has become reemphasized among community banks, some wonder, 'Does the shareholder want to pay salaries to executives when they are not making money for them?'" she asks.

David Swinford, president and CEO of Pearl Meyer & Partners, an executive compensation consulting firm, said the recent collapse or near-collapse of so many once venerable firms serves to remind directors that "preserving the corporation" should be their top concern. To do that, he suggested that boards work to avoid "group think."

The upcoming January through March "pay decision-making season" should also see directors "worried about how to balance pay for non performance," Swinford said.

Preliminary results of a SOP survey due out shortly by compensation consultancy Pearl Meyer & Partners shows that nearly 70 percent of 127 respondents haven't taken any steps to prepare for a "Say-on-Pay," and only a quarter say their companies are either "prepared" or "very prepared" for such votes.

Just 7 percent of respondents say they're "very concerned" about a SOP vote, while more than half are either "somewhat concerned" or "not at all concerned." Meanwhile, 44 percent say they expect an SOP requirement in the 2010 proxy season.

"At this point it doesn't appear that there's a tremendous amount of concern around SOP," says Michael Enos, a managing director in PMP's Boston office. That's somewhat surprising, says Enos, since the pay decisions being made about 2009 pay could potentially be subject to a shareholder vote as early as next year.

"Given that the TARP companies that had to implement say-on-pay votes this year were caught by surprise and had to scramble to put it in the proposals, you’d expect people to learn from that," says Enos.

Practitioners Assess House, SEC Proposals To Manage Risk-Taking in Setting Exec Comp

Deborah Lifshey, managing director of Pearl Meyer & Partners in New York, told BNA July 23 that although the SEC's power is limited to disclosure, when disclosure rules change, "companies carefully scrutinize the optics of their programs." Unfortunately, Lifshey said, in many cases this may lead to the "tail wagging the dog" — compensation programs designed to be pleasing to the investor's eyes, rather than compensation designed to attract, retain, and motivate an excellent management team that is in fact intended to foster long-term benefits for shareholders."

"If risk must be disclosed and it is perceived as 'bad,' companies may lean towards elimination of the good kind of risk that encourages innovation and expansion," Lifshey said.

"[This legislation] will have a tremendous impact on boards. The goal is transparency and accountability and this will force companies to be transparent and accountable in their compensation programs," says Deborah Lifshey, managing director, Pearl Meyer and Partners. If signed into law, she thinks the mandate will help companies to be clearer about pay in their CD&As and have more confidence in their pay programs.

"In North Carolina about 27 banks took TARP money," said Laura Hanf, vice president of Pearl Meyer & Partners, a compensation consulting firm based in New York with offices in Charlotte. There are more than 200 state-chartered banks. "But what will happen is you're going to see some trickle down effect based on" what the Obama administration is proposing as a platform on executive pay, she said.

Indeed, the pressures on perceived excesses in executive compensation extend beyond bank firms. "What you really are going to see is pressure for companies to eliminate most of the perquisites for executives, especially ones that are seen in the public eye as luxury expenditures," Hanf said. "Personal use of aircraft, redecorating expenses for your office. In this economic environment it is going to be very difficult for companies to defend those perquisites."

"Where there is an urgency around a certain course of action or result, it is not uncommon to see a board say, 'For this year we are going to put all our eggs in one basket. This is the one thing we want management to focus on and what we will reward them on,' " said Jannice Koors, managing director of Pearl Meyer and Partners, a New York-based executive compensation consulting firm

Now that companies receiving Troubled Asset Relief Program funds are required to allow say-on-pay votes, it is only a matter of time before the requirement is expanded to include all public companies, said Susan O'Donnell, managing director in the Southborough, Mass., office of New York executive compensation consulting firm Pearl Meyer & Partners LLC. “Nobody's going to escape this, ” Ms. O'Donnell said.

“The days of an individual producer making a $20 million bonus in a year are going to decline,” said David Swinford, president and CEO of Pearl Meyer Partners, a New York-based executive compensation consultant....“I do think that HR will put more emphasis on people who follow rules well as opposed to the super-entrepreneurial types.”

Obama Administration Wants to Give Investors More Say on Executive Compensation - But Will the Changes Go Far Enough?

One expert warned, however, that it would be troubling if Feinberg was given too much power. "Should [Feinberg] oversee, supervise and control compensation at these companies? Sure. Should he actually be designing programs and setting individual pay levels? That's concerning," said Susan O'Donnell, managing director at compensation consultancy Pearl Meyer & Partners.

"I think we're going to see more [performance] measures on things like liquidity and capital that in the past weren't as big an issue," said Susan O'Donnell, a Boston-based managing director at compensation consultant Pearl Meyer & Partners.

Susan O'Donnell, a banking consultant and managing director in the Boston office of Pearl Meyer & Partners, agrees with [community bankers'] sentiments regarding guilt by association. "All banks are being painted with the same brush — inappropriately so," she said. "The small community banks were not the drivers of the banking crisis, but they are living with the repercussions."

Indeed, more companies are considering such special retention arrangements as cash contributions made to deferred compensation accounts for CFOs than for other top executives, according to David Swinford, president and CEO of Pearl Meyer & Partners, a New York-based compensation consulting firm.

Recent surveys of company pay practices reveal a spate of salary freezes and, in some cases, reductions. "Companies that were talking about 4% to 5% increases in October are now talking about freezes," says Pearl Meyer's Swinford. As financial results continue to suffer, the decline in annual performance bonuses is likely to accelerate, especially in hard-hit industries such as retail and construction.

"The message to companies: Their programs are biased (toward executives) over the long term," said David Swinford, who heads the compensation consulting firm Pearl Meyer & Partners.

"Companies are looking for stuff that isn't central to their pay programs," said David Swinford, chief executive of the compensation consulting firm Pearl Meyer & Partners. "Optics are very critical right now."

The mix [of long-term incentives] a committee chooses depends on its priorities. For retention, look to time-based restricted stock; for performance, look to options, says Jim Heim, managing director at Pearl Meyer & Partners in Southborough, Mass.

'If you're a company that's accepting Troubled Asset Relief Program (TARP) funds, you're now subject to a set of very, very strict regulations under the American Recovery and Reinvestment Act (ARRA),' says Deborah Lifshey, a managing director at Pearl Meyer & Partners, an executive compensation consulting firm in New York. Over the past few months, it's become abundantly clear that government help comes "with a lot of strings attached," she says. Just how onerous the new executive compensation regime will be remains to be seen. "The ARRA has so many holes you could drive a truck through it," laments Lifshey.

Lifshey recommends considering say on pay a year in advance because a vote during the 2010 proxy season will be a referendum on the practices of 2009. In other words, saysLifshey, "as compensation committees make their decisions this year, they have to know the decisions will be under the microscope and may well be subject to a shareholder vote next year."

[Some] say that, in a good economy, bankers began to view their bonuses as entitlements instead of as performance pay – another incentive against being prudent.

"People were incented to bet big," said Laura Hanf, vice president of Pearl Meyer & Partners, a compensation consulting firm with offices in Charlotte. "If you win, you make millions. If you lose, there's always next year, or there's always another job, and by the way, the job probably comes with a six-figure sign-on bonus."

In Slump, Firms Move Performance Goalposts - Companies Reward Executives Despite Poor Results

Four in 10 companies surveyed by compensation consultancy Pearl Meyers & Partners last month said they might pay out less than what the executives would have been entitled to based on corporate performance.

"Most of these companies are small community banks, and this is the first time a lot of them have heard of say-on-pay," says Susan O'Donnell, head of the banking practice at compensation consulting firm Pearl Meyer & Partners. "A lot of the calls I've been getting have been, 'What's say-on-pay and what does it mean?'"

Most small community banks actually have conservative pay practices, O'Donnell says. "[But] there's such ire against banks generally, even healthy banks are getting a bad rap. My concern is that they'll all get tarred with the same view."

David N. Swinford, president and CEO of Pearl Meyer & Partners, noted that since [a similar survey taken by the firm in November], Directors and executives have moved closer together in their expectations for change. "It is difficult to fix a problem until both parties acknowledge that something is wrong," he said. "This suggests a positive coming together of minds on the need for significant change."

The market turmoil and increased public scrutiny of executive pay continue to impact companies' compensation decisions, with more companies mulling freezing salaries, lowering bonus payouts, and cutting stock-based awards, according to the latest survey by compensation consultancy Pearl Meyer & Partners. Among 436 board members, executives, and human resources professionals surveyed in February, 90 percent say the troubled economy will color their compensation decisions over the next six months. The poll, Executive Pay in the New Economy, updates a similar study of 410 participants conducted by Pearl Meyer & Partners last November.

Boards and management are increasingly moving to reexamine executive pay design even in industries not directly affected by the executive pay restrictions imposed by Treasury on companies that have taken federal TARP funds, says David Swinford, president and CEO of Pearl Meyer & Partners.

Fully 90% of respondents in February [to the Executive Pay in the New Economy survey series] said the troubled economy will color their compensation decisions over the next six months. "That suggests that in contrast with the sustained economic and executive pay growth of the previous decade, many Boards realize they will have to better manage executives' expectations about their likely career earnings," said David N. Swinford, president and CEO of Pearl Meyer & Partners.

"It is difficult for companies to justify executive salary increases when growing numbers of employees face layoffs and more firms are struggling just to survive," said David N. Swinford, president and CEO of Pearl Meyer & Partners, in a press release.

Boards also are less willing to cushion executives from plummeting market prices..."Boards are rejecting the argument that larger grants are needed in 2009 to replace the retention 'glue' provided by past stock awards that have lost enormous value in the market downturn," Swinford said.

Susan O'Donnell, a managing director at compensation consulting firm Pearl Meyer & Partners says a troubling aspect is that the law "takes a broad-brush approach and puts all of the banks in the same group," unlike the Treasury rules, which differentiated between healthy firms and those that need "extraordinary assistance."

The restrictions essentially "eliminate pay for performance and eliminate the ability of compensation committees to make pay decisions other than base pay," O'Donnell says. Under the new restrictions, she says, "Even small, local community banks with conservative pay programs will see pay cuts."

Jannice Koors, managing director at pay consultant Pearl Meyer & Partners, said banks have to make sure that even for the executives they keep, pay is not slashed too much. "It is a 'deferred brain drain' risk," she said. "The minute this market turns around, and those executives' phones start to ring with other opportunities, they will be more willing to listen."

Practitioners Critique Treasury TARP Rules Designed to Curb Excessive Executive Pay

"It's entirely reasonable to expect some sort of restraint with respect to executive compensation when you take government funds," Mark Rosen, managing director in the Charlotte, N.C. office of the compensation consulting firm Pearl Meyer & Partners. However, Rosen was critical of Treasury's policies, especially a proposed rule that would permit restricted stock for TARP executives to vest only after the government had been repaid the money it invested. Treasury effectively established a single performance measure to trigger the vesting of restricted stock, "which is thou shalt repay the government as soon as possible," Rosen said. "Is that in the best interest of creating jobs? Is that in the best interest of loaning money and doing the things that banks are supposed to be doing?"

Mark Rosen of Pearl Meyer & Partners, a compensation consulting firm, said the move [to cap salaries for executives of companies receiving federal rescue money] has pros and cons. "I personally think it's reasonable to put some sort of restraint on executive compensation when you use government money," Rosen said.

Jannice Koors, managing director at pay consultant Pearl Meyer & Partners, said banks have to make sure that even for the executives they keep, pay is not slashed too much.

"It is a 'deferred brain drain' risk," she said. "The minute this market turns around, and those executives' phones start to ring with other opportunities, they will be more willing to listen," she said.

"Being in the middle is the safe ground," says Jannice Koors, Pearl Meyer & Partners managing partner. "Companies can attract and retain highly qualified directors and not worry about being accused of overpaying. Meanwhile, companies in the middle are perceived as not paying so much that their directors have lost the veneer of independence."

Two places where there were double-digit increases this year over last, notes Koors, are at opposite ends of the spectrum: the largest and smallest companies on the Top 200. This year's analysis underscores how the competition for director talent among the largest Top 200 companies has pushed up the rate of compensation. "The smaller companies— in the wake of SOX and the increased exposure to directors as a result—are still playing catch-up to what is a minimum level of pay required for the agony for being on any public company board today," Koors says.

Losing It - Holding a Personal Financial Stake in their Companies Has Cost Many Managers a Bundle

"If the stock price is down 30 to 40 percent, even if it's a market issue and you're hitting internal targets," says compensation consultant Jim Heim at Pearl Meyer & Partners, "there's a perception of misalignment between shareholders and executives" if executives reap rewards.

Salary freezes are on the table at hundreds of companies, according to the results of a November survey conducted by compensation consulting firm Pearl Meyer & Partners... Moreover, 36 percent of respondents to the survey said they plan to pay a bonus that's "below formula"—that is, less than what executives would have earned based on achievement against the plan's stated objectives. "Compensation committees aren't just relying on poor performance to produce lower results," says Jim Heim, a managing director at Pearl Meyer & Partners.

Utilities may find it easier to develop incentive pay packages because of their relatively stable revenue flows. Regulatory agencies set utility rates on a 12-month or longer time period, which can include fuel price pass-alongs, facilitating long-term incentive planning. "Utilities have been more protected from the Wall Street slump," says Jim Heim of Pearl Meyer & Partners. "There isn't the same level of panic [as in other sectors].

As long as banks are getting government support, it will be harder for them to pay out large bonuses to senior executives, said Jannice Koors, managing director at compensation consultancy Pearl Meyer & Partners. "There's a recognition that paying large bonuses now does not look good," Koors said.

Pearl Meyer & Partners CEO David Swinford was the focus of a Q&A on how the economic downturn will affect compensation programs, including why some executives aren't complaining about the lack of a bonus in 2008.

Nobody wants to be the poster child for greed. There are a lot of executives out there who recognize that they're in this for the long haul, and the last thing they want to do is damage relationships with the board or with shareholders when times are tough for everybody.

The Median is the Message - Director Compensation at Large-cap Companies is Beginning to Moderate

The Top 200 companies tend to be leading indicators and thus provide relevant guidance for all comp committees, according to Jannice Koors, PM&P managing director. Contributing to the middling trend is an increasing fear of being an outlier. "Being in the middle is the safe ground," Koors says. "Companies can attract and retain highly qualified directors and not worry about being accused of overpaying. Meanwhile, companies in the middle are perceived as not paying so much that their directors have lost the veneer of independence."

"When you look at the increase in compensation, it is coming in the form of equity rather than cash, and if I'm a shareholder, I probably think that's a good thing," saysKoors...Boards among the Top 200 also seem to have found a pay mix that is working. It consists of about 60 percent equity and 40 percent cash. "I think companies today would have a very tough time coming up with a viable rationale why it made sense to move away from a pay structure that is at least 50 percent equity. That would be a very tough sell,"Koors explains.

"If there's a silver lining to all of this, it's [that] the IR community and boards are more willing to talk," says Deborah Lifshey, managing director of Pearl Meyer & Partners....A congressional say-on-pay bill will probably not specify how boards should phrase the policy in their proxy statements, says Lifshey. The House bill last year was broadly worded, and it would be harder to pass a bill that was too specific

Fiduciary responsibilities, and the increasing workload they entail, can be intimidating. "We're living in the age of transparency and heightened disclosure," says Jim Heim, managing director of Pearl Meyer & Partners.

The Median is the Message - Director Compensation at Large-Cap Companies is Beginning to Moderate

"When you look at the increase in compensation, it is coming in the form of equity rather than cash, and if I'm a shareholder, I probably think that's a good thing," says Jannice Koors, Pearl Meyer & Partners managing director.... "I think companies today would have a very tough time coming up with a viable rationale why it made sense to move away from a pay structure that is at least 50 percent equity. That would be a very tough sell."

"Boards are more cognizant of the optics of what they are doing," said Jim Heim, Managing Director of Pearl Meyer & Partners, who helped compile the report [on the expected impact of the economic downturn on executive compensation programs]. "Extraordinary measures need to be taken."

"You've got to pay the army that is generating the results for the organization - there is no question about that," said Dave Swinford, president and CEO of the compensation consulting firm Pearl Meyer & Partners..."I think all of the most senior executives are thinking hard about what the right thing is for the organization and frankly for themselves in the long run," said Swinford.

Pearl Meyer & Partners President David Swinford participated in a Q&A on the impact of the current economic crisis on executive pay programs.

"Directors are refocusing on a few specific areas. Many are looking at how to deal with pay for underperformance and how to properly compensate top executives until their companies can make money again. Another area is retention. Right now, there is less competition for executive talent across many industries, so a company that wants to invest ahead of the turn of the cycle can effectively recruit...Directors [also] need to get a better handle on risk – not just how much risk the incentive plan encourages, but how much risk the company has actually taken on. It's quite obvious that a lot of directors, and not only at financial services firms, didn't fully understand their organizations' level of risk."

"The changes brought by this act are so significant that compensation committees, whether they seek aid under EESA or not, are advised to remain wary for any additional guidelines Congress may release,'' Deborah Lifshey, managing director at Pearl Meyer & Partners, told BNA.

''The developments we are seeing strongly indicate that Congress may try to pass measures similar to those of the EESA that would apply to all firms in general in the near future,'' she added.

The newly released standards give compensation committees of companies seeking federal aid much more responsibility, according to Lifshey. Lifshey further noted that the EESA might also affect the operations of companies on the margin of seeking federal aid.

''If a company contemplates seeking relief from the government, it will want to start preparing by revising its compensation structure to fit federal guidelines as soon as it can. With the new guidelines, there is a specific list of requirements that a firm must satisfy in order to qualify for aid,'' she explained.

Lifshey said that although currently compensation committees for companies not seeking aid are not affected by the EESA's measures, those committees have a compelling reason to keep up with new guidelines as they are released, for these changes could very well be a harbinger of what other legislation is to come.


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